Anytime I’ve written about Alibaba (NYSE:BABA) this year, the analysis and conclusion have been virtually identical. Chinese stocks are out of favor, large-caps like BABA stock are suffering alongside their smaller brethren, and the price trends across the board look like a bloody horror flick.
Sure, the details have varied, and the setups have been slightly different each time I’ve ventured into the chart, but the price has been singing the same song all along.
It’s been one of pain and losses for existing shareholders. For onlookers and would-be buyers, it’s been one laced with caution and warning. Those who have heeded the signs this year and avoided bottom fishing have been spared grief and disappointment.
We’ll dive deeper into Alibaba’s current state down below, but allow me to begin with my conclusion; Bulls should continue to steer clear for now.
Beijing Sinks BABA Stock and Others
The drama transpiring in Chinese companies listed on U.S. exchanges is not a simple matter of emerging markets falling out of favor because of a strong dollar or garden variety capital rotation. It’s a trend born and nurtured by Beijing.
This year, the country’s leaders announced their intent to drastically increase their oversight of domestic companies that list on stock exchanges in the United States. The crackdown is drastically increasing uncertainty with investing in the broad swath of Chinese companies currently available to U.S. investors.
It’s not just BABA that’s suffered. Baidu (NASDAQ:BIDU), Tencent (OTCMKTS:TCEHY), and DiDi Global (NYSE:DIDI), among others, have seen their share prices decimated. The iShares Chinese Large-Cap ETF (NYSEARCA:FXI) is the largest and most liquid fund that tracks popular Chinese companies, and its share price is down 24% from its peak.
Alibaba Stock Chart
Alibaba’s price chart is laced with the usual bearish signals you’d expect from a stock that is on the outs with investors. Its 200-day, 50-day, and 20-day moving averages are all trending lower.
The rollover started last November, and every bottoming attempt has failed so far. What’s perhaps most depressing is the losses have come while U.S. stocks have enjoyed one of their best runs in history. It’s one thing to lose nearly half your value when all equities are wrestling with a bear market. It’s quite another to do it when the S&P 500 is notching record highs every single week.
In late July, the plunge we saw that ended with the convincing bullish hammer candle on July 27 was a convincing sign of short-term capitulation. Unfortunately, the follow-through hasn’t been great. We barely reached the descending 20-day moving average before sellers swarmed. This morning’s 1.6% decline has prices threatening to break support and return to the 52-week low.
Even with a pretty good imagination, I’m finding it difficult to spin anything bullish here.
Pick a Path With BABA Stock
Traders are left with two obvious choices here. Avoid bullish trades or join the bears. If you’re favoring the latter path, here’s my bearish trade of choice.
The Trade: Buy the September $190/$180 put spread for $3.30.
The max loss of $3.30 will be forfeit if BABA stock sits above $190 at expiration. The max gain is $6.70 and will be captured if prices are below $180 by expiration. To increase the probability of profit, you could exit whenever we touch $180. That way, if the stock ends up rebounding before expiration, you won’t give back all your profits.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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